The FTSE 250, often overshadowed by its larger counterpart, the FTSE 100, may be ready for a turnaround in 2025. This index of mid-cap companies has weathered a perfect storm of challenges, including higher interest rates and a sluggish British economy. These have weighed heavily on its performance — it’s down 5% over five years. However, as we enter a new phase of monetary policy (falling interest rates), the unloved FTSE 250 could present an opportunity for investors to generate significant wealth.
Good omens
The FTSE 250 has typically outperformed during periods of falling interest rates. As the Bank of England embarks on a rate-cutting cycle, this trend could reassert itself. During previous rate-cutting periods, such as 1992-1994, the FTSE 250 delivered an impressive 87% total return, significantly outpacing the broader market.
The potential for outsized returns is further supported by projections for earnings growth. In 2025, FTSE 250 companies are forecast to grow earnings by over 18%, compared to just 9% for FTSE 100 firms — that’s according to research from abrdn. This disparity in growth prospects could drive investor interest towards mid-cap stocks.
Picking winners
Some sectors and companies will be more exposed to prevailing economic conditions than others. While some investors will prefer investing in index trackers funds, others may see an opportunity to beat the market. This could mean investing in companies that are more exposed to changes in interest rates.
Banking stocks, such as Close Brothers Group, may see improved lending activity and profitability. Meanwhile, retailers like Frasers Group could also receive a boost as consumer spending potentially increases.
However, it’s important to recognise that the index has heightened sensitivity to domestic economic conditions. This means it can be more volatile than the FTSE 100. Moreover, developments like the recent depreciation of the pound could push up costs for many businesses, notably those that import products and sell to UK consumers.
One to consider
Hollywood Bowl (LSE:BOWL) is an interesting prospect for FTSE 250 investors. The seven analysts covering the stock currently have a median target of 404.1p, with a high of 440p and a low of 288p. This median estimate represents a 40% increase from the current share price.
Berenberg recently said Hollywood Bowl was “best in class”, noting strong fundamentals, a good management team, and a solid runway for growth. This was issued after the company reported record revenues for the year in December.
However, like many businesses, it expects a tax hit from the October budget. It also recently took a £5m impairment on its mini-golf operations. Nonetheless, forward guidance remains pretty strong and the leisure facility owner has a plan to almost double its site number over the next decade.
From a valuation perspective, the figures are rather strong. It’s trading at 14.4 times expected earnings for this current year, and that falls to 11.4 times for 2027. This, combined with a 4.2% dividend yield, means I’m actually very intrigued by this proposition. I’m not buy now, but I’m going to add this one to my watchlist.
I wouldn’t say this stock offers investors the chance to get rich, but it could put them on the path to greater wealth creation in 2025.
